There is light at the end of the renewable power tunnel

JUDGING by comments at the World Future Energy Summit in Abu Dhabi recently, and recent statements by the South African Wind Energy Association, investment in the renewable energy sector is declining in Africa in general and in South Africa in particular. Evidence, however, indicates that far from experiencing a “rolling blackout”, such investments face a clean, well-lit future.

A number of considerations support this. First, Africa is experiencing a remarkable growth surge that will require substantial infrastructure investments. Second, there is time pressure to roll out new power generation to address a rapidly declining reserve capacity in South Africa. Third is the increasing cost burden of carbon emissions; and finally, there is the opportunity to align fixed investment — such as renewable energy projects that provide tangible social and developmental advantages — with local procurement policies, skills training and employment for the rapidly growing population both in the rural and urban areas.

Africa’s population stands at just more than 1-billion and is expected to double by 2050. According to a report by the International Renewable Energy Agency (Irena), titled Africa’s Renewable Future, in 2012, more than 590-million Africans (57% of the population) had “no access to electricity”, and 700-million (68% of the population) were “living without clean cooking facilities”.

More than 40% of the population lives in rural areas.

Separate economic reports put Africa’s growth at an average rate of 4% per year, and claim that over the past decade sub-Saharan Africa had six of the world’s 10 fastest-growing economies.

Africa’s gross domestic product is expected to “increase roughly threefold by 2030 and sevenfold by 2050”, and as the Irena report says, “sustaining such growth will only be possible if fuelled by a much larger and better performing energy sector”. South Africa is dependent upon 90% of its electricity supply coming from coal-fired power stations, while the rest of the country’s power is split between nuclear and hydroelectric schemes. Given South Africa’s economic growth since 1994 and the increased requirement to maintain, upgrade or replace its aging thermal power stations, pressure on power generation capacity has increased significantly over the past 15 years. The government’s Integrated Resource Plan 2010 (IRP2010) estimated that South Africa’s installed capacity would need to grow by 40GW (double the current capacity) in the next 20-25 years to meet existing and forecast demand.

While dependence on fossil fuels remains the government’s priority, the IRP2010 makes a substantial concession to including renewable energy in its plans. South Africa’s renewable energy programme has followed an extremely well run, clean and transparent procurement process to date, which has given it significant credibility in the eyes of the international renewable investor community. The Department of Energy’s Renewable Energy Independent Power Producers Procurement Programme (REIPPPP), launched in August 2011, provides for the procurement of 6, 925MW from renewable energy sources, primarily onshore wind, concentrated solar power and solar photovoltaic. The REIPPPP is being conducted in six rounds and following the third round, announced late last year, the development of 64 renewable projects that were awarded power production contracts to date is in progress, representing a collective investment value of R150bn and a combined installed capacity of 3,933MW.

While some investors may continue to favour fossil fuels, the Renewables Global Future Report 2013, published by the Renewable Energy Policy Network for the 21st Century (REN21), indicated that investment and ownership in renewable energy would come from a broad array of “investment sources, mechanisms, and models, including insurance companies and pension funds, utilities, oil companies, retail investors, sovereign wealth funds, banks, public equity, and multilateral finance”.

There is the added incentive for these investors to consider the associated responsible investment policies that take account of environmental, social and governance issues in renewable projects.

Such policies tend to adopt risk-return perspectives when pursuing energy investments (in other words favouring renewables, or at least a combination of renewable and fossil fuels) rather than straightforward traditional cost-benefit perspectives.

REN21 points to the growing demand for “transformational change”, which is not simply about “technology and infrastructure, but about models of social, institutional, business, and policy change”.

Increasingly, cities, municipalities and regions are striving to reduce their carbon footprint, which means investing in and promoting renewable energy policies.

Gone are the days when we could rely on conventional technologies that fit “centralised, inflexible, and commodity-like systems”. The new paradigm requires system designers who think in terms of “flexibility, modularity, multiple levels of service and reliability with energy becoming more service-like and less commodity-like”.

It is not only governments and local authorities that wish to reduce the cost of carbon emissions; investors are increasingly aware of their responsibility to support environmentally positive initiatives, and investments such as renewables will increasingly be favoured.

Apart from the obvious benefits of clean power production and the ability to construct renewable energy projects much faster than traditional thermal power stations, the South African government has recognised the potential impact that the renewable industry will have on job creation, skills transfer and economic development.

Irena has published several reports on the benefits of renewable energy in terms job creation, improving local skills and creating income-generating activities. The SMART Electricity Planning document prepared by the Electricity Governance Initiative of South Africa says its research found that “investment in renewable energy can stimulate economic growth, create abundant and sustainable new jobs, replace outmoded fossil fuel-based jobs and have positive knock-on effects, including for the poor and for rural livelihoods”.

It points out that renewable energy job creation is not only about replacing coal jobs with renewable ones but that there will be a “positive knock-on effect on rural livelihoods and job creation”.

The focus on localisation is expected to be a key underpin to the sustainability of the renewable energy programme and the challenge for investors will be to operate within these parameters to ensure that their REIPPPP bids comply and are ultimately successful. This has not deterred prospective investors so far, as evidenced by the growing number of bidders in successive rounds of the renewable energy programme.

According to REN21, global investment in renewable energy was approximately $290bn in 2011, up from a mere $40bn in 2004. Some economists say “private investment in renewables could exceed $500bn annually by 2020”. It would at best be an oddity should South Africa and the rest of Africa not be part of this power game, and at worst an aberration. I believe, however, that investors do see the opportunity of establishing operations in South Africa to supply the rapidly growing demand for renewables in the sub-Saharan market.

• Semple is a credit analyst with Futuregrowth Asset Management.